On August 5, 2014, the Internal Revenue Service (“IRS”) released Revenue Procedure 2014-37 which increased the threshold percentage for determining whether health coverage offered by an employer to an employee is considered affordable from 9.5% to 9.56%. As a result of the increase, coverage offered to an employee for 2015 will be considered affordable if the employee’s contribution for self-only coverage does not exceed 9.56 percent of the employee’s household income for the taxable year. The Patient Protection and Affordable Care Act (“PPACA”) provides that this statutory definition of affordability will be indexed beginning with plan years starting in 2015; therefore, the increase put forth by the IRS was expected.
Because employers do not know their employees’ household incomes, previously released regulatory guidance allows them to use one of three affordability safe harbors: one based on the employee’s Form W-2; a second based on the employee’s rate of pay; and the last based on the federal poverty guidelines for a single individual. Under the Form W-2 safe harbor, the employee contribution toward self-only coverage for the employer’s lowest cost coverage providing minimum value cannot exceed 9.5 percent of the employee’s Form W-2 Box 1 wages for that calendar year. An employer satisfies the rate of pay safe harbor with respect to an hourly employee for a calendar month if the employee’s contribution for the
lowest cost self-only coverage that provides minimum value does not exceed 9.5 percent of an amount equal to 130 hours multiplied by the lower of the employee’s hourly rate of pay as of the first day of the coverage period (generally the first day of the plan year) or the employee’s lowest hourly rate of pay during the calendar month. With respect to a non-hourly employee, an employer satisfies the rate of pay safe harbor if the employee’s contribution for the calendar month for lowest cost self-only coverage that
provides minimum value does not exceed 9.5 percent of the employee’s monthly salary, as of the first day of the coverage period. Lastly, an employer satisfies the federal poverty line safe harbor if the employee’s required contribution for the lowest cost self-only coverage that provides minimum value does not exceed 9.5 percent of the federal poverty line for a single individual for the applicable calendar year, divided by 12.
Although the affordability percentage defined by PPACA was increased, the IRS did not increase the percentages associated with the safe harbors. The distinction between the statutory definition of affordable and the regulatory safe harbor definition is that the statutory definition allows for the percentage to be indexed, whereas, the regulatory safe harbor rate used by the safe harbors does not get indexed and remains at 9.5%. As such, although the affordability threshold is being increased to 9.56%, the percentage used by the safe harbors will not change and remains at 9.5%. This is important to note because it is expected that most employers will opt to use one of the safe harbors available by regulation to meet the affordability standard. However, as the affordability percentage in the statute is indexed and increases every year, the disparity between the two percentages will continue to grow. Therefore, it is expected that some clarification or amendment is forthcoming.
The intent of this analysis is to provide general information regarding the provisions of current healthcare reform legislation and regulation. It does not necessarily fully address all your organization’s specific issues. It should not be construed as, nor is it intended to provide, legal advice. Your organization’s general counsel or an attorney who specializes in this practice area should address questions regarding specific issues.
Original Article: https://ajg.adobeconnect.com/_a815130238/hcr_081414a/